What is market-based HR?

Small business want to pay their staff enough to retain and motivate them, but not so much that they can't remain profitable. Most employers want to pay their people a fair rate.

But what's a fair rate?  What's "fair" based on?

Market-based HR means that HR is not created and maintained in a vacuum, particularly when it comes to pay and benefit practices.  This means the company understands the external job market (for example, their direct competitors for more specialized industry positions, or a larger pool of companies for horizontal jobs such as Accounting, marketing or IT support for comparison purposes).

It's only when one understands market-based compensation that a company can decide to lead (pay more to be more competitive), lag (pay less, for example for certain jobs that are not in high demand) or meet, the going market rates. 

Some industries – and in many cases, organized labor – don't incorporate the realities of the market into their pay structures and focus mainly on internal data and equity.  They ignore external economic realities that affect the monetary value of jobs – such as ebb and flows of the market, supply and demand – and find themselves unable to remain profitable.